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Resale is All The Franchise Rage

What are the advantages and disadvantages of buying an existing franchise unit?

If you have a retail location, you will wait for the site selection process to be completed, then wait again for the lease signing and build-out phases. Next you wait for customers to find you. If you have a service-based business, you have to go out and sell your services. Finally, you will wait until the income from your store exceeds your expenditures – the point at which you start “making” money.

One way to skip the wait and jump-start your new venture is to buy an existing franchise operation. Ramp-up time shortens drastically and you’re up and operating within days of signing the papers.

However, that franchise was up for sale for a reason and that reason may or may not impact the success of the next owner. Before you sign on the dotted line, run through this checklist to inform your decision:

  • First, evaluate the franchisor before you evaluate the existing business.

    • Examine the FDD (Franchise Disclosure Document)

    • Talk to the corporate staff

    • Perform your due diligence by calling existing franchisees

  • Once you are satisfied with the standards of the franchisor, talk to the owner of the unit you are considering and ask the following questions:

    • What is the current owner’s motivation for selling?

    • Is the unit successful?

    • What has the financial performance of the franchise been over the past year or two?

    • Does the current location have key employees? If so, how likely are they to stay with the business when you have assumed management?

  • When you are satisfied with answers on how the business has been run, move on to questions about the physical location, such as:

    • What is the status of the current lease?

    • Will any of the equipment need replacing in the near future?

    • Have there or will there be changes to the demographics in the neighborhood of the store that will adversely impinge on your ability to run a profitable business?

    • Does the city plan to make any changes to the roads or areas around the business that could impede your customers from reaching you?

There are many reasons why a successful business person may wish to sell a thriving business such as illness, retirement or simply the desire to do something else. Your challenge as a potential buyer is to find out if the motivation the seller says he has matches what’s really happening. The last thing you want is to be stuck with a business that is on a downward slide, either because of mismanagement or because the business doesn’t fit the neighborhood.

A business owner is not likely to tell you that he’s been losing money because he can’t keep employees or lacks customer service skills. That would be like a home seller saying that the house is great except the neighbors are noisy and the roof leaks. But in any case, the disadvantage of buying a business with a bad reputation outweighs any perceived advantages. You will need to dig deep to find out the real reason the current franchisee wants out.

If you are buying an existing business, the price you pay should be based on how well the business is performing. You would expect to pay well for a business earning money and should pay a lower price for a unit that is not. Therefore, determining how the business is doing is critical to your decision and the valuation of the unit.

Buying an existing franchise may be a shortcut but whether it turns into a success or a disaster depends on how thoroughly you research the franchise company. Rely on experts to help you.

Remember that buying an existing business is a negotiation process and that you are under no obligation to accept the seller’s price. Your place of power is that you can always buy a new franchise and start from scratch, often for the same or less money. So don’t be tempted to accept the offer unless you have done enough research to determine if the price is fair and that the business stands a very good chance of success with you as the new owner..

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